The right to be paid is a fundamental component of any employee's contract of employment. Background information on how a contract of employment is formed and what its contents are can be found elsewhere in this Guide ( Contracts ).
A written contract is likely to state the employee's basic rate of pay or salary and the intervals at which it will be paid.
Some contracts also give employees the right to an annual pay review. An employer may wish to state what the basis of the review will be. The review might, for example, be based on the individual's performance in the job, or the rise in the cost of living over the past year or the coming year, or a combination of these factors. The advantage of including these details is that both employer and employee are clear about the basis on which the review will be conducted, and that should reduce the likelihood of a dispute about the result. The disadvantage is that the company must then conduct the review within the framework of the factors it has specified, or it will be acting in breach of the employee's contract. Therefore, if a review were stated to be dependent on the increase in the cost of living, it would be a breach of contract for the employer to refuse to pay it because it was dissatisfied with the employee's performance.
It would also be a breach of contract for an employer to act irrationally or perversely in reviewing an employee's pay. Therefore, if a company reaches a decision on a pay review that no reasonable employer could have reached, it is acting in breach of contract. If the intention is that a pay review will not necessarily result in a pay increase, the contract should make that clear.
A written contract is also likely to state how an employee's wages or salary will be paid, whether by credit transfer into the employee's bank account, by cheque or in cash.
Payment systems can be complicated, often including elements linked to individual or group performance or company profit. Where employees are entitled to these types of payments, it may not be practicable to include full details in the main body of their written contract: their contract may need to refer to and incorporate some other documents where the detail can be found (incorporating terms ). A contract could, for example, incorporate another document that sets out in detail how shift premiums are calculated.
If a company wants the flexibility to amend these aspects of an employee's pay, it needs to ensure that the contract makes clear that the details may be amended from time to time. This could be done in the body of the written contract or in any document that is incorporated into it by reference.
If an employee's pay rate is set by collective bargaining, then his or her contract is likely to incorporate the pay agreement that the company reaches with its recognised union from time to time. For clarity, it is advisable for the contract to include an express incorporation clause, although it is also possible for collective agreements to be incorporated into employees' contracts on an implied basis (incorporation by implication ).
A company may want a particular payment, typically a bonus or an increase after a pay review, to be within its discretion. Making a payment discretionary means that the company can decide whether or not it is paid and how much it should be, and the employee has no legal right to insist on a payment. It is, therefore, important for the contract to make clear when a benefit is discretionary.
The contract may spell out the factors that the company will take into account when exercising its discretion. The advantage of including those details is that both employer and employee are clear about how the discretion will be used, which should reduce the likelihood of a dispute if the benefit is withheld. The disadvantage is that the company must then exercise its discretion within the framework of the factors it has specified, or it will be acting in breach of the employee's contract. Therefore if a discretionary bonus is stated to be dependent on the employee's performance, it would be a breach of contract for the employer to refuse to pay it in order to keep within budget on its pay bill.
It would also be a breach of contract for an employer to act irrationally or perversely in deciding whether to make a discretionary payment. So if a company refuses to make a discretionary payment in circumstances where no reasonable employer would have done so, it is acting in breach of contract.
A company should be clear about its contractual position before withholding a payment from, or reducing a payment to, an employee. Courts and tribunals view employees' pay rights as fundamentally important. If an employer fails to respect those rights, a court or tribunal is likely to take the view that the employee is entitled to resign and claim that he or she has been constructively dismissed (constructive dismissal ).
In addition, an employer that reduces or withholds a payment that is properly payable to an employee may face a claim for damages for breach of contract (damages ) or a claim that it has made an unlawful deduction from the employee's pay (deductions from pay).